In new guidance released on July 17, 2013, the SEC encourages money market funds and investment advisers to carefully consider the risks of counterparty default in tri-party repurchase (commonly known as “tri-party repo”) transactions. In a repo agreement, a fund can buy a security from a bank, which in turn agrees to repurchase the security after a pre-agreed time frame. The third party in a tri-party repo is the clearing bank. In its guidance, the SEC recommends that funds and advisers take the following advance steps to prepare to handle a tri-party repo default: (i) review the master repurchase agreements and related documentation to consider any specified repo default procedures; (ii) consider the operational aspects of managing a repo default; and (iii) consider whether there are potential legal considerations under the Investment Company Act of 1940 (such as under Rule 2a-7) or otherwise that the fund could analyze in advance or will need to evaluate in the event of a repo default. The SEC notes that the guidance is addressed largely to money market funds because such funds tend to have more significant holdings of tri-party repos than other types of mutual funds.